Amid the craft beer acquistion craze, Boston Beer has stood pat, and there aren’t really signs that will change soon. But this column on Seeking Alpha, an awesome investor website, threw out one possible avenue for a big investor to come in with a takeover bid despite the fact the company has a Class B stock structure in which Jim Koch controls 100 percent of the voting rights. Here is how this scenario just played out with famed chocolate company Hershey’s, which has a similar Class B structure in which Milton Hershey controls the majority vote, just received a takeover bid from Mondelez:
If I were a team member of an aggressive investment banking team, I would be pitching Constellation Brands (NYSE:STZ), Heineken (OTCQX:HEINY), or perhaps a Japanese brewer with Japan’s negative interest rates to try and steal Boston Beer for $250 per share. Yes, Mr. Koch, would need to remain Chairman, and have lost of oversight, but his vision and innovation would be welcomed. Incidentally, I have written prior articles where I discuss the fundamentals of Boston Beer, so I am not going to rehash them in this piece. However, at face value, if we look at valuation, using yesterday’s close, Hershey’s enterprise value to sales would be 3.5 times. Boston Beer is trading slightly above 2 times enterprise value to sales.
In addition, Fidelity just dumped nearly 600,000 in shares in Q2. Look there is more to it, but if you’re interested you’ll have to read the whole thing on Seeking Alpha.
Elsewhere on Seeking Alpha, the Craft Brew Alliance is being looked at as ripe for a merger or acquisition. But wait, isn’t the company producing some meh earnings results outside of Kona? And isn’t the stock kind of overvalued right now?
But the seeming overvaluation on an earnings basis doesn’t properly incorporate the split between an asset-based and earnings-based valuation for BREW. Despite the high earnings multiple, I’ve been bullish for the past year or so: I do like the “Kona-plus” strategy, and I do think there’s significant value in the assets, which can drive substantially higher valuations from the current $10+ handle. But if something doesn’t happen soon, I wonder how patient investors should be.
I’ve been relatively bullish on BREW for the past few quarters, largely because it seems like a purely logical acquisition target. And of late, the market has agreed. An 8-K that updated “golden parachutes” drove shares up nearly 8% earlier this month, providing more fuel for what’s been a ~30% rally over the past five weeks.
It’s difficult to believe that the recent rally has been driven by anything other than M&A speculation.
The column makes the case that other than the M&A possibility, there isn’t a ton to love about the company’s performance as an investor, which makes the time now for such a move. Waiting could lead to impatient investors.
In the last five years, CBA has developed one of the most popular craft brands and the number one gluten-free brand while serving one of the hottest consumer goods markets in recent memory. Over that period, EBITDA has increased less than 30% — total. Nearly all of the revenue and gross profit gains have been eaten up by higher SG&A spend.
But from an earnings/cash flow perspective, CBA’s performance over the past five years has been horrific, to be blunt. There are few companies in any space that see both the industry-wide tailwind and the product development success (with Kona and Omission) that CBA has. But profits barely have moved, and the company has burned $12 million in cash over the past three years combined.
There’s a ton of insight and data to back up this perspective, and if interested, definitely head over to Seeking Alpha for the full thing.